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* The Link to the Guidebook is now corrected. Our Apologies if you attempted to open in the last email.

 

DEERFIELD NEWS CONNECTION

August 31, 2023

 

The upcoming election of the first HOA Board of Directors comprised of owners is extremely important and presents all HOA members with the opportunity to weigh-in on the vision, goals, and objectives of the association. In preparation for the first owner-controlled board, it is essential that those wishing to serve on the board are fully informed of the associated duties and responsibilities. Below are summary snapshots of Tennessee Laws that may help potential board candidates understand the requirements for serving on the HOA’s board of directors.

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What Every Board Member Should Know, A Guidebook for Tennessee Nonprofits, 2019 Edition 

published by the Tennessee Attorney General and Reporter, Secretary of State, and Center for Nonprofit Management.

 

Formation and Purpose

 

Tenesseese laws describe a HOA as a Nonprofit (TN Code § 48-51-101) Mutual Benefit Corporation (TN Code § 48-68-104), often referred to as a membership corporation formed to serve the mutual interest of its members for common gain.  HOA’s are designed to foster a strong sense of community, encourage active property owner participation, provide services and amenities to the residents, care for and upkeep all common areas, protect property values and keep sound financial records.

 

Governance

 

Under Tennessee law, each corporation must have a board of directors to guide its actions and activities. During the period when the HOA is under developer control, board members are selected by the developer; however, when the HOA is under owner control, board members are selected through an open election in which all owning property in the community have a vote. To ensure the continuing success of the HOA, board members need to understand the duties and responsibilities owed to the organization. 

 

The minimum requirements of compliance for a nonprofit corporation board of directors (TN Code § 48-51-101, et. seq.) include:

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• enforcing provisions of the declarations, articles, and bylaws;

• paying taxes and assessments on common areas;

• contracting insurance on behalf of the association;

• contracting goods and services for the upkeep of common areas;

• delegating any power to committees, officers, employees as authorized;

• preparing annual budgets and financial statements for the members and the secretary of state; and formulating rules of     operations for the common areas and facilities.

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Record Keeping Requirements

 

It is the responsibility of the board of directors to keep detailed records on file at the office of the HOA, including: 

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• minutes of all meetings and actions of the board for the last three years;

• records of board member actions taken without a meeting;

• records of actions taken by board committees as delegated by the board;

• appropriate accounting and financial records, including annual financial statements;

• record of all members in alphabetical order, including addresses and number of votes allocated;

• the charter and all amendments in effect;

• the bylaws and all amendments in effect;

•  board resolutions relating to any class or category of members;

• minutes of all members’ meetings and approvals for the last three years;

• any written communications to the members for the last three years; 

• the names and business or home address for current directors or officers; and

• the most recent annual report filed with the secretary of state.

 

These records should be made available to HOA members during regular business hours within five days of a written request.

 

Fiduciary Duties

 

Acting as a fiduciary is the highest standard of duty implied by law.  Under Tennessee law (TN Code § 48-58-301), this means that each board member must act in a manner that gives first consideration to the HOA’s benefit with no consideration of their own interests. The membership is placing their utmost trust in the elected board members to properly manage the property, money, and safety standards of the HOA community. Nonprofit boards/board members are required to adhere to the following fiduciary duties:

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• Duty of Good Faith – Board members have a duty to be faithful to the organization’s purpose, mission, and governing documents; ensure all funds are used for lawful purposes abiding by all state and federal laws and regulations.

 

• Duty of Loyalty – Board members are required to be faithful to the interest of the organization and its objectives over personal interest or those of family and friends, thus avoiding all conflicts of interest.

 

• Duty of Care – Board members must exercise care in all dealings, act reasonably in the development of policy direction, maintain oversight of all financial matters, be well informed on matters before the board and attend board meetings.

 

Conflict of Interest

 

Under the law, each elected board member has fiduciary duties to all property owners and must always represent and protect the interest of the homeowners. Under Tennessee code (TN Code § 48-58-701-703), a board member must disclose potential conflicts consistent with the requirements of the law to avoid conflicts of interest. A conflict occurs when a board member has a material financial interest or a material relationship in any transaction.   

 

• A Material Financial Interest means a board member would by means of a board transaction personally benefit from that transaction.  Personal gain would reasonably be expected to impair the objectivity of the board member’s judgement when voting on the authorization of the transaction. 

 

• A Material Relationship means a family member, friend or fellow business professional known to the board member would personally benefit from the transaction, again impairing the objectivity and judgement of the board member when voting on the transaction. 

 

Whether by Material Financial or Material Relationship, under Tennessee code, a board member and/or officer of the board who breaches their fiduciary duties KNOWINGLY or through NEGLECT may be held personally liable to the HOA for the harm it suffers.  As long as a board member fulfills their responsibilities and avoids any conflicts of interest, they will be following the law and fulfilling their fiduciary duties.